Mandhana Industries to raise Rs 108 cr via fresh issue

The textile sector seems to be on a revival mode. With orders from international players starting to flow, textile companies are set to benefit. Mumbai based Mandhana Industries is planning an initial public offer (IPO) to part finance the expansion of its garmenting and yarn dyeing and weaving facility.

Part of the fund will be utilised to give margin money for its working capital. The company is proposing an IPO to raise Rs 108 crore through a fresh issue of 83 lakh shares. The issue constitutes 25.06% of the post issue paid up capital of the company.

BUSINESS:

Mandhana Industries is a third generation-run company with its inception in the early 80's. A multi-divisional vertically integrated player; it has units in Mumbai, Tarapur and Bangalore. The company is present across the entire textile value chain from yarn dyeing to garment manufacturing. Its textile and garment division makes for 67% and 33% of its revenues respectively for FY09.

The company has a capacity of 180-lakh metre per annum (Lmpa) of griege fabric. Processing capacity of finished fabric is 516-L m p a and yarn dyeing capacity of 30 L kg p.a. Its client list includes Aditya Birla Nuvo, ITC, Turtle, Giny & Jony, and international brands like Tommy Hilfiger, FCUK, RIP CURL.

About 88% of the garment business comes from exports with European countries making up for more than three-fourth of the export revenue. Exports make up for 28% of the total top line for the year ended March 2009. The company ventured into women's wear about three years ago and intends to expand this.

EXPANSION PLANS:

The company plans tao double its existing weaving capacity to 180-L m p.a. It aims to increase its garments production capability from 36-lakh pieces p a to 83-lakh pieces p.a. This planned expansion, funded by the issue and TUF term loan is to be carried out at the Tarapur unit in Maharashtra. This would involve an outlay of Rs 170 crore and one fourth of this has already been spent.

FINANCIALS:

Mandhana's topline has demonstrated a CAGR of 24.7% in the past three financial years, despite the slowdown in 2009. A bulk of the growth has come from a CAGR increase of 29% in the garmenting division. Exports were the key driver within the segment. The profit margins, however, have been constrained in FY09 and nine months ended December 2009. Interest and raw material cost have been on the higher side.

Nonetheless, the company operates at high EBIDTA margin of about 21%. For FY09, its garment division clocked an operating margin of 25% as against 16% in textile business. Going forward, the company would focus on high value garmenting business to drive its profitability.

RISKS:

The company is still to place orders for some of its machinery needed for expansion. Moreover, its top five customers constitute about 42% of its sales. Yet another risk is the foreign exchange fluctuation that Mandhana is exposed to due to the nature of its business. The company's debtor's turnover days have gone up drastically for the nine months ended December 2009 and a year before that and so has inventory. Going ahead, it could prove to be a concern if not looked into.

VALUATIONS:

Post-issue, the company will be valued at 11.3x its annualised earnings for the financial year ended March 2010 at the higher end of the price band and 10.4 times at the lower end. However, as the business is skewed by seasonal factors and the March quarter (which accounts for a higher share of revenues) results are not available, annualising the results will not provide a correct picture.

Bombay Rayon, one of its peers is trading at 13.5 times its annualised FY10 earnings. Alok Industries and the likes are not comparable because of other segments in their portfolio. The added advantage of Mandhana is that its balance sheet is one of the least leveraged in the industry. Considering the positive outlook for the textile sector and growth potential of the company, investors can invest in the IPO of Mandhana Industries.